26 October 1998 GST/HST Interpretation HQR0001065 - Application of Subsection 167(1.1) to Payment to Recipient

You have asked us whether the GST is applicable to the XXXXX payment made pursuant to XXXXX (the Agreement) dated as of XXXXX. In addition, you have asked whether the section 167 election would apply such that no tax would be payable in respect of the XXXXX payment.

Background

1. Under the Agreement XXXXX (the Seller) desires to sell, assign and transfer, and XXXXX (the Buyer) desires to purchase and acquire, substantially all of the assets of a division of the Seller (the Division).

2. The Division is engaged in the manufacture and sale of various XXXXX products and XXXXX from its production facilities located in XXXXX and its sales and administrative office in XXXXX (the Business).

3. Section XXXXX of the Agreement entitled XXXXX states, in part:

"(a) Notwithstanding any other provision of this Agreement, the parties agree that responsibility for the following environmental matters identified in the XXXXX Corporation report dated XXXXX relating to the XXXXX facility shall be borne as follows: ...

(iv) Seller will reimburse Buyer for XXXXX of the costs of installing a primary XXXXX wastewater treatment system prior to XXXXX, payable upon completion of such installation and presentation of documentation reasonably satisfactory to Seller of such expenditures; ....

4. It is assumed that the Seller and the Buyer are eligible to file the election under subsection 167(1) related to the supply of the Business under the Agreement.

5. The total cost of the XXXXX water clarifier treatment system was approximately XXXXX[.]

6. The XXXXX water clarifier treatment system is the property of the Buyer; the Seller has no claim in respect of this property.

7. No GST was charged on the XXXXX payment made pursuant to clause XXXXX of the Agreement.

Comments

In determining the application of the GST to this payment it is important to ascertain whether the Seller received something in return for the payment and whether that something received is a supply that is made in the course of a commercial activity of the Buyer.

The Department has generally taken the position that payments made by a commercial organization have a purchase purpose and are consideration for a supply. In addition, TIB-067, which clarifies when a particular transfer payment may be regarded as consideration for a supply, states: "[g]enerally, businesses are presumed to make transfer payments for purchase purposes rather than in the public interest. Where the grantor is a commercial organization, therefore, the transfer payment will normally be regarded as consideration." Based on our analysis of the Agreement under which the XXXXX payment is made there is no indication that the payment is being made for a public purpose. Therefore, the payment appears to have a purchase purpose and be consideration for a supply.

The XXXXX payment was made only after certain actions had been undertaken by the Buyer. This indicates that the Seller was not willing to give money to the Buyer for any purpose and wanted the Buyer to perform certain actions in exchange for the amount paid by the Seller. The performance of certain actions by the Buyer constitutes the provision of a service based on the broad definitions of "supply["] and "service". The amount that the Seller agreed to pay in exchange for the Buyer performing these actions constitutes consideration for the supply made by the Buyer to the Seller. There are no provisions in the Act which would exempt this supply and the supply is made in the course of the commercial activity of the Buyer. Therefore, the supply is a taxable supply.

To determine whether section 167 election would apply to the supply such that no tax would be payable in respect of the supply the provisions in the section must be reviewed. Subsection 167(1) states specifically that the provisions of this subsection will only apply where certain conditions are met including the condition that a supplier must make a supply of a business or part of a business. Paragraph 167(1)(a), in part, deems the supplier to have made a separate supply of each property and service that is supplied under the agreement. Paragraph 167(1)(b) provides that except where the supplier is a registrant and the recipient is not a registrant, the supplier and the recipient may make a joint election to have subsection (1.1) apply to those supplies. The words "those supplies" in paragraph 167(1)(b) clearly qualify that subsection (1.1) only applies to the supplies referred to in paragraph (a) of that same subsection. As a result, the words in paragraph 167(1.1)(a) can not be interpreted to apply to supplies made by the recipient to the supplier.

Based on our understanding of the facts provided, it is our opinion that the XXXXX payment from the Seller to the Buyer made pursuant to claus XXXXX of the Agreement is consideration for a supply and that the subsection 167(1) election would not apply. Therefore, GST is payable by the Seller in respect of the XXXXX payment.

If you require additional information or clarification please contact me at (613) 952-9262.

M. Dawn Weisberg